Updated 1/15/2009

The NYSE Rate of Change (ROC) chart is very helpful in getting the "big picture" view quickly. The old saying "a picture is worth a thousand words" is very applicable to this chart. Once you understand how to read the ROC chart you can easily spot the direction of the market which makes it easy for you to know whether you want to be invested in the market or not.

The NYSE Rate of Change (ROC) chart shows the annual rate of return along the left axis and the years since 1990 along the bottom.

Since this chart shows the rate of return rather than the current price it is much easier to see performance, we don't have to guess if we are up or down from last year. If we are below the zero line... we are down, if we are above the zero line... we are up. The key is to exit positions while we are in positive territory (with a gain) rather than waiting until we have a loss and then we can reenter when we get a buy signal.

The red line is the 12 month moving average. As with most moving averages a buy signal is generated as the index crosses above the moving average and a sell signal is generated as the index crosses below the moving average.  (See Current Analysis Below)

Another helpful way to use this chart is to look at the slope of the red moving average line. If the slope is down the market is trending down if the slope is up the market is moving up. And obviously if the line is basically flat the market is not trending at all. 

Just because this chart is not moving higher does not mean we should sell.  In the period from May 2005 - May 2007 the red moving average line was basically flat, although it had a bit of wiggle, but it was still flat at around 12% rate of return so holding during that period would have produced returns above the long term average. 

If you are looking for big gains, the best buy signals come from a movement from below the 0% line. This allows you to capture the greatest up move.

Note: While viewing this chart we must remember that it represents the rate of return we would have earned if we had been holding the entire NYSE for the previous 12 months. Which can be achieved through the use of an index fund.

Current Analysis:

The NYSE ROC is up about 300 points over the last month for a monthly gain of 4.3%.

This gives us a 39.78% annual gain, back in February of 2004 the NYSE ROC peaked at  41.95% so we are very near those lofty levels. 

But this is not your average rebound,  it is a rally based on unprecedented levels of Federal "Funny Money" creation.  So the question is, how long will the rally last?

That is a good question, we are definitely in uncharted territory since there has never been a money infusion of this magnitude before. But all that money could cause the market to explode to unimaginable heights and/or send us into hyperinflation where the real purchasing power of those dollar denominated shares are virtually worthless.

But at this point we still have a buy signal in the NYSE. The ROC will tell us when the market has turned the corner downward so stay tuned. Don't miss our next  Signal! Subscribe to our Free E-zine and we will notify you when this chart is updated .
 

For more information see the NASDAQ ROC Chart and How to Decide if the Rally is Real or Not .

Tim McMahon, Editor
Financial Trend Forecaster

Disclaimer:

At Financial Trend Forecaster we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.

Note: We are a  compensated affiliate of Elliottwave International, meaning we may receive a commission if you use our links to their site.

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